Ross et al.: Fundamentals

of Corporate Finance, Sixth

Edition, Alternate Edition

11. Project Analysis and Evaluation

Evaluation

(^378) © The McGraw−Hill
Companies, 2002

CHAPTER

11

Project Analysis

and Evaluation

Do you rememberthe Las Vegas Outlaws? On February 3, 2001, the World

Wrestling Federation (WWF) and NBC debuted the Xtreme Football League, or

XFL, their challenge to the NFL. Led by Vince McMahon, the games featured a

race to the ball instead of a coin toss, a live view of the locker room at halftime,

and interviews with cheerleaders. The XFL roared out of the gate, initially

drawing 16 million viewers for its first broadcast, but the audience quickly tired

of the league. NBC’s March 31 telecast drew the lowest rating for a prime-time

program on a major network in modern television history. In May 2001, WWF and

NBC announced the league was terminating operations. Losses for the group

were estimated to be at least $70 million.

Obviously, the WWF and NBC didn’t planto lose $70 million in 10 weeks, but

it happened. As the short life and quick death of the XFL show, projects don’t

always go as companies think they will. This chapter explores how this can

happen and what companies can do to analyze and possibly avoid these

situations.

n our previous chapter, we discussed how to identify and organize the relevant cash

flows for capital investment decisions. Our primary interest there was in coming up

with a preliminary estimate of the net present value for a proposed project. In this

chapter, we focus on assessing the reliability of such an estimate and on some addi-

tional considerations in project analysis.

We begin by discussing the need for an evaluation of cash flow and NPV estimates.

We go on to develop some tools that are useful for such an evaluation. We also examine

some additional complications and concerns that can arise in project evaluation.

EVALUATING NPV ESTIMATES

As we discussed in Chapter 9, an investment has a positive net present value if its mar-

ket value exceeds its cost. Such an investment is desirable because it creates value for

its owner. The primary problem in identifying such opportunities is that most of the time

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